M/s. INTERNATIONAL GLOBAL NETWORKS BV, MUMBAI V. DDIT (INT. TAXATION) - 3(1), MUMBAI

ITA 2865/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1026 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L1
• Next Hearing Date: 03-06-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 25-04-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R C DANDAY
• Assessee Lawyers: DIWESH CHAWLA
• Keywords: Double taxation relief; Permanent establishment; TDS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L-1 MUMBAI BEFORE SHRI P.M. JAGTAP (AM) AND SMT. ASHA VIJAYAR AGHAVAN (JM) ITA NO. 2865/MUM/2008 ASSESSMENT YEAR-2004-05 INTERNATIONAL GLOBAL NETWORKS B.V (FORMERLY KNOWN AS SATELLITE TELEVISION ASIAN REGION ADVERTISING SALES B.V.) C/O STAR INDIA PVT. LTD., STAR HOUSE, OFF DR. E. M MOSES ROAD , MAHALAXMI, MUMBAI - 400 011 VS. THE DDIT, (INTERNATIONAL TAXATION)-3(1), SCINDIA HOUSE, BALLAR PIER MUMBAI-400 038 (APPELLANT) (RESPONDENT) A PPELLANT BY: SHRI DIWESH CHAWLA RESPONDENT BY: SHRI R.C. DANDAY O R D E R PER SMT. ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DT. 18.2.2008 PASSED BY THE LD. CIT(A)-XXXIII, MUMB AI FOR THE ASSESSMENT YEAR 2004-05. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE, M/S . INTERNATIONAL GLOBAL NETWORKS B.V. (FORMERLY KNOWN AS SATELLITE T ELEVISION ASIA REGION ADVERTISING SALES B.V.) IS A COMPANY INCORPORATED I N NETHERLANDS WAS GRANTED THE EXCLUSIVE RIGHT FOR SALE OF ADVERTISING TIME IN INDIA ON THE CHANNELS UPTO 31.03.1999. THE ASSESSEE APPOINTED STAR INDIA PVT. LTD. (SIPL) (FORMERLY KNOWN AS NEWS TELEVISION INDIA LTD .) AS ITS COLLECTING AGENT IN INDIA WITH RESPECT TO ADVERTISING CHARGES FROM INDIAN ADVERTISERS FOR ADVERTISEMENT PLACED ON THE CHANNELS. FOR THI S SIPL IS ENTITLED TO A ITA NO. 2865/M/08 2 COMMISSION OF 15% ON THE RECEIPTS FROM INDIAN ADVER TISERS, NET OF ADVERTISING AGENCY COMMISSIONS. 3. THE REVENUES EARNED BY ASSESSEE IN INDIA ARE REP ORTED TO TAX ON A RECEIPT BASIS AT A DEEMED PROFIT RATE OF 10% UNDE R THE PROVISIONS OF CIRCULAR 742 DATED 02.05.1996 ISSUED BY THE CBDT. DURING THE YEAR UNDER CONSIDERATION, ALTHOUGH NO INCOME ACCRUED TO THE ASSESSEE, IT WAS IN RECEIPT OF ADVERTISEMENT REVENUES RELATING TO IN VOICES RAISED PRIOR TO 01.04.1999. THE ASSESSEE FILED ITS RETURN OF INCO ME FOR ASSESSMENT YEAR 2004-05 ON 26.10.2004 REPORTING TAXABLE INCOME OF R S.3,94,33,643/-. THE ASSESSEE IS A TAX RESIDENT OF THE NETHERLANDS A ND IN THE RETURN OF INCOME, IT RESERVED THE RIGHT TO BE TAXED AS PER TH E PROVISIONS OF THE INDIA-NETHERLANDS DTAA (INDIA-NETHERLANDS TAX TREAT Y) EVEN THOUGH IT WAS OFFERING ITS INCOME TO TAX AS PER THE PROVISION S OF CIRCULAR NO.742 DATED 02.05.1999 ISSUED BY THE CBDT. 4. THE ASSESSMENT U/S.143(3) WAS COMPLETED ON 20.09 .2006 ON A PROTECTIVE BASIS BY CONCLUDING THAT THE INCOME WAS TAXABLE IN THE HANDS OF SATELLITE TELEVISION ASIAN REGION LIMITED (STAR LTD.), ITS HOLDING COMPANY ON THE GROUND THAT THE ASSESSEE IS A MERE CONDUIT FOR STAR LTD. THE INCOME OF THE ASSESSEE HAS BEEN COMPUTED AT THE RATE OF 20% OF THE GROSS ADVERTISING REVENUE OF RS.10,80,266/-, WHICH WORKS OUT TO RS.2,16,053/-. 5. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE LD. CIT(A). 6. THE LD. CIT(A) HELD AS FOLLOWS: I FIND THAT THIS GROUND HAS ALREADY BEEN ADJUDICAT ED BY MY PREDECESSOR IN THE APPELLATE ORDERS FOR THE ASSESSM ENT YEAR 1998- 1999, ASSESSMENT YEAR 2001-02 & ASSESSMENT YEAR 200 2-03 AND MY PREDECESSOR HAS DECIDED THE ISSUE AGAINST THE AS SESSEE. ITA NO. 2865/M/08 3 7. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), ASSESS EE PREFERRED AN APPEAL BEFORE US AND RAISED THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) HAS ERRED IN CONFIRMING THAT THE APPELLANT IS A CONDUIT FOR SATELLITE TELEVISION ASIAN REGIO N LTD (STAR LTD) 2. THE LD. CIT(A) HAS ERRED IN CONFIRMING THE TAXAT ION OF ADVERTISEMENT RECEIPTS ALBEIT ON PROTECTIVE BASIS. 3. HAVING HELD IN GROUND 1 OF THE APPEAL ORDER THAT THE APPELLANT IS A CONDUIT OF STAR LTD., THE LEARNED CI T(A) HAS NOT CONSIDERED IT RELEVANT TO ADJUDICATE ON THE BALANCE GROUNDS OF APPEAL AS DETAILED BELOW: (I) THE APPELLANT DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT EXECUTED BETWEEN INDIA AND THE NETHERLANDS (NETHERLANDS TREATY) AND (II) WITHOUT PREJUDICE TO THE ABOVE, THE COMPUTATI ON OF PROFITS OF THE APPELLANT ON AN ADHOC BASIS AND TAXE D THE SAME ON AN ACCRUAL BASIS. 4. THE LD. CIT(A) HAS ERRED IN NOT GRANTING APPROPR IATE CREDIT FOR TDS CLAIMED BY THE APPELLANT. 8. THE LD. COUNSEL FOR THE ASSESSEE SHRI DIWESH CHA WLA SUBMITTED THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FO R THE ASSESSMENT YEARS 1998-99 AND 2001-02. WITH RESPECT TO GROUND NO. 1 & 2, THE TRIBUNAL HELD AS FOLLOWS: THE BASIC CASE OF THE REVENUE, IN OUR HUMBLE UNDERSTANDING, IS THAT THE ASSESSEE BEFORE US IS US ED AS A COMMERCIALLY IRRELEVANT IN INTERMEDIATE ENTITY, WHI CH ARE USUALLY REFERRED TO PE BLOCKER, SO AS TO RESTRICT T AX EXPOSURE OF THE STAR LIMITED IN INDIA. IT IS ON THIS BASIS THAT THE ASSESSING OFFICER HAS COME TO THE CONCLUSION THAT T HE REAL TAXABILITY OF ADVERTISING REVENUES MUST LIE IN THE HANDS OF THE STAR LIMITED. AS A COROLLARY TO THIS, ACCORDING TO THE ASSESSING OFFICER, THE SAID INCOME CANNOT BE TAXED IN THE HANDS OF THIS ASSESSEE. THE CASE OF THE REVENUE TH US HINGES ITA NO. 2865/M/08 4 ON ITS PERCEPTION THAT THE STAR LTD IS DERIVING TAX ADVANTAGE BY INSERTING THE ASSESSEE COMPANY AS A LINK IN CHAI N OF ENTITIES TO GET THE ADVERTISING REVENUES. THIS PERC EPTION IS, HOWEVER, CLEARLY ERRONEOUS. AS HELD BY HONBLE BOMB AY HIGH COURT IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LTD VS DDIT (307 ITR 205), IN TERMS OF CBDT CIRCULAR NO. 23, W HERE A NON RESIDENTS SALE TO INDIAN CUSTOMERS ARE SECURED THR OUGH AN AGENT, THE ASSESSMENT IN INDIA OF THE INCOME ARISIN G FROM THE SAID TRANSACTION WILL BE RESTRICTED TO AMOUNT OF P ROFIT WHICH IS ATTRIBUTABLE TO THE AGENTS SERVICES. NO DOUBT, T HIS CIRCULAR IS NOW WITHDRAWN WITH EFFECT FROM 22 ND OCTOBER 2009 BUT A WITHDRAWAL OF THE CIRCULAR, AS IS THE SETTLED LEGAL POSITION, IS ONLY PROSPECTIVE IN NATURE. IN THE RELEVANT PERIOD, THE CIRCULAR WAS VERY MUCH IN FORCE AND CANNOT BE IGNORED. NOW, WHETHER THE ADVERTISING REVENUES ARE TAXED IN THE HANDS OF THE ASSESSEE COMPANY OR IN THE HANDS OF THE STAR LIMITE D, THERE IS NO DISPUTE THAT THE ADVERTISING REVENUES ARE GEN ERATED THROUGH THE COMMISSION AGENT I.E. STAR INDIA PVT LT D AND THAT THE COMMISSION AGENT HAS BEEN PAID A FAIR REMUNERAT ION FOR ITS SERVICES. THAT INCOME IS ALREADY TAXED IN THE H ANDS OF THE STAR INDIA PVT LTD, AND, IN TERMS OF THE CIRCULAR 2 3, TAXABILITY IN RESPECT OF SUCH SALES CANNOT EXTEND BEYOND THAT INCOME. IN VIEW OF THE LEGAL POSITION AS IT NOW STANDS NOW, TH ERE IS NO TAX ADVANTAGE IN ROUTING THE REVENUES THROUGH THE A SSESSEE COMPANY. IN ANY CASE, WE HAVE ALSO NOTICED THAT THE ASSESS EE COMPANY WAS FORMED NOT ONLY FOR PROCURING ADVERTISI NG BUSINESS FROM INDIA BUT ALSO FROM OTHER COUNTRIES. IT IS THUS CLEAR THAT THE ASSESSEE GROUP CHOSE TO CENTRALIZE T HE SALE OPERATIONS TO THE ASSESSEE COMPANY ON A GLOBAL BASI S AND IT WAS NOT DRIVEN BY INDIAN TAX CONSIDERATIONS ALONE. LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO ADDRESSED US AT L ENGTH ON COMMERCIAL JUSTIFICATION OF ROUTING THE ADVERTISING SALES BUSINESS THROUGH THIS COMPANY, WHICH INCLUDED TRADE DISPUTES SETTLEMENTS OF STAR LIMITED WITH ITS FOR MER ASSOCIATE MEDISCOPE WHICH WAS APPOINTED EXCLUSIVE A GENT FOR SOME PART AND NON EXCLUSIVE AGENT FOR OTHER PART OF THE BUSINESS IN INDIA, AND WHICH IS WAY THE ASSESSEE C OMPANY HAD TO BE BROUGHT TO THE PICTURE. COPIES OF DOCUME NTS EVIDENCING THESE DISPUTES AND THEIR SETTLEMENTS WER E ALSO FILED BEFORE US. LEARNED DEPARTMENTAL REPRESENTATI VE COULD NOT POINT OUT ANY REASONS AS TO WHY ALL THESE COMME RCIAL JUSTIFICATIONS CAN BE IGNORED. ITA NO. 2865/M/08 5 BASED ON THE MATERIAL BEFORE US IN THE CASE OF TH IS CASE, THERE IS NO GOOD REASON THUS TO DISREGARD THE EXISTENCE OF THE ASSESSEE COMPANY AND PROCEED TO TAX THE ENTI RE ADVERTISING REVENUE IN THE HANDS OF ITS PARENT COMP ANY. IT IS DIFFICULT TO UNDERSTAND THE REASONING ADOPTED BY TH E CIT(A) WHO HAS OBSERVED THAT GIVEN THE FACTS OF CASE, IT W OULD BE MORE APPROPRIATE TO TAX THE INCOME IN THE HANDS O F THE STAR LIMITED. HE EXERCISED A CHOICE WHICH WAS NOT AVAILA BLE TO HIM. WHAT IS TO BE TAXED IN THE HANDS OF STAR LIMIT ED IS TO BE DECIDED WHEN THE ASSESSMENT OF STAR LIMITED IS FINA LIZED, AND HOW CAN ANY FINDING BE GIVEN AGAINST STAR LIMIT ED WITHOUT EVEN HEARING THE SAID ASSESSEE. THE COURSE OF ACTION ADOPTED BY THE CIT (A), IN TAXING THE INCOME IN THE HANDS OF THE STAR HONG KONG RATHER THAN DOING SO IN THE HAND S OF THE ASSESSEE, DOES NOT MEET OUR APPROVAL. HAVING SAID S O, HOWEVER, WE MAY HASTEN TO ADD THAT THIS DECISION WI LL HAVE NO BEARING ON THE QUESTION AS TO WHETHER THE STAR L IMITED WILL BE TAXABLE IN RESPECT OF THESE INCOMES DIRECTL Y, AS WE DO NOT WANT TO BE SEEN AS PRE-EMPTING THE DECISION IN THE CASE OF STAR LIMITED. THAT IS A QUESTION WHICH CAN BE DECID ED AFTER TAKING INTO ACCOUNT MATERIAL ON RECORDS IN THAT CAS E AND AFTER HEARING THE STAR LIMITED, NO IS IT ANY OF OUR CONCE RN TO GIVE THAT FINDING. THE SUBJECT MATTER OF APPEAL BEFORE US MUST BE RESTRICTED TO THE APPEAL BEFORE US, AND WE SHOULD B E CAREFUL IN BEING WITHIN THESE LIMITS. ALL WE CAN SAY IS THAT, ON THE BASIS OF MATERIAL PRODUCED BEFORE US IN THE CASE OF THIS ASSESSEE, THERE IS NO GOOD REASON TO COME TO THE CONCLUSION T HAT THE INCOME FROM SALE REVENUES OF ADVERTISING TIME DOES NOT BELONG TO THE ASSESSEE. WE LEAVE IT AT THAT. FOR THE REASONS SET OUT ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSING OFFICER WAS NOT QUITE JUSTIFIED IN TAXING THE INCOME FROM ADVERTISING TIM E SALES IN INDIA COULD NOT BE TAXED IN THE HANDS OF THE ASSESS EE. HE OUGHT TO HAVE TAXED THE SAME IN THE HANDS OF THE AS SESSEE COMPANY. RESPECTFULLY FOLLOWING THE ABOVE DECISION IN ASSES SEES OWN CASE, WE ALLOW THESE GROUNDS RAISED BY THE ASSESSEE. 9. REGARDING GROUND NO. 3 THE TRIBUNAL HELD AS FOLL OWS: AS REGARDS THE OTHER ISSUES RAISED IN THIS APPEAL, ITA NO. 2865/M/08 6 WE HAVE NOTICED THAT THE CIT(A) HAS NOT REALLY ADJU DICATED UPON THE SAME. WE, THEREFORE, REMIT THE MATTER TO T HE FILE OF THE CIT(A) FOR FRESH ADJUDICATION ON THE SPECIFIC G RIEVANCES RAISED BY THE ASSESSEE ON THE QUANTIFICATION OF TAX ABILITY OF INCOME AND OTHER CONSEQUENCES. RESPECTFULLY FOLLOWING THE ABOVE DECISION WE REMIT THE MATTER TO THE FILE OF THE LD. CIT(A) FOR FRESH ADJUDICATION. 10. REGARDING GROUND NO. 4 WE DIRECT THE AO TO GRAN T APPROPRIATE CREDIT FOR TDS CLAIMED BY THE ASSESSEE. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 23 RD DAY OF JULY, 2010 SD/- SD/- (P.M. JAGTAP ) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 23 RD JULY, 2010 RJ COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR L-1 BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 2865/M/08 7 DATE INITIALS 1 DRAFT DICTATED ON: 12.7.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 13.7.2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______